A newly issued bond pays its coupons once a year. Its coupon rate is 4.5%, its maturity is 20 years, and its yield to maturity is 7.5%.
a. Find the holding-period return for a one-year investment period if the bond is selling at a yield to maturity of 6.5% by the end of the year. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Holding-period return %
b. If you sell the bond after one year when its yield is 6.5%, what taxes will you owe if the tax rate on interest income is 40% and the tax rate on capital gains income is 30%? The bond is subject to original-issue discount (OID) tax treatment. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
Tax on interest income $
Tax on capital gain $
Total taxes $
c. What is the after-tax holding-period return on the bond? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
After-tax holding-period return %
d. Find the realized compound yield before taxes for a two-year holding period, assuming that (i) you sell the bond after two years, (ii) the bond yield is 6.5% at the end of the second year, and (iii) the coupon can be reinvested for one year at a 2.5% interest rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Realized compound yield before taxes %
e. Use the tax rates in part (b) to compute the after-tax two-year realized compound yield. Remember to take account of OID tax rules. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
After-tax two-year realized compound yield %